As important as any aspect of business planning – although sometimes not as easily discussed – is a succession strategy that can actually be implemented easily and with minimum disruption to your practice when required.
So often all the planning goes into the frontend of a business – launching, developing and building a practice certainly takes vision and consideration of the options and contingencies required.
Just as vital, though, is succession planning – and it is crucial that this aspect of your business involves more than half-baked or non-existent solutions.
Creating that plan is the process of determining what you want (or need) to have happen to your practice when you retire or leave the practice. Hopefully, any exit is planned and voluntary, but the plan should be comprehensive enough to deal with all contingencies, including forced retirement and death.
if you are a business owner, having a valid Will is only half of the story
The Basics
As the saying goes, there’s no better time than the present. This is particularly true when considering succession planning.
The most basic step is, perhaps, ensuring the existence of a valid Will. Without this, a person who dies is considered “intestate” and all their personal assets (after repayment of debts) will be distributed according to rules fixed by law, which can vary depending on location. These rules are inflexible, and may produce a result that is contrary to what may have been intended (or expected) to occur.
Administering the estate of an intestate person is also more expensive and more complicated than administering an estate with a valid Will.
So, by ensuring you have a current and valid Will that reflects your wishes, you are not only saving money – you’re also saving a lot of unnecessary inconvenience for the loved ones you leave behind. Once you have established your Will, it should be revisited periodically, and if necessary, updated to ensure that beneficiaries, executors and if applicable, guardians of any infant children, reflect your circumstances, as they change from time to time.
However, if you are a business owner, having a valid Will is only half of the story.
A Common Misunderstanding
A Will can only deal with assets owned by the person making the Will. This sounds obvious, however, many people do not appreciate that they do not actually own assets that are held in a trust (such as a family trust), or a company structure. There is often confusion in the distinction between the assets that someone owns and those they control.
It is for this reason that having a Will alone is usually not enough if you’re a business owner. Many business owners operate their business using a trust or a company structure, both of which are separate legal entities, which continue to exist even after the person dies. Thought needs to be given not only to who will assume control and responsibility for the business on your death, but how this can be achieved. This is not just about having an exit or a retirement strategy – as these contemplate a voluntary departure from the business while you are still alive. Your business may be your most valuable asset and, while there will inevitably be disruption to your business on your death, whether or not the disruption is so great that it also destroys the business will depend largely on your business succession plan.
These issues are further complicated where a business owner is in partnership (regardless of the structure used) with another person. In the absence of an adequate business succession plan, on the death of one partner, the remaining partner may suddenly find themselves in partnership with the spouse of the deceased partner. This may not be appropriate or possible for a number of reasons, particularly in professions such as optometry where the spouse may not have the necessary skills or qualifications, irrespective of whether or not they have the desire to be involved. Most commonly, the spouse of the deceased partner will be relying on receiving a payout for the business interest to pay for the mortgage, the school fees and daily living expenses.
Half-baked Solutions
A common arrangement, which is sometimes implemented between business partners, is that on the death of one partner, the other partner is granted an option to buy out the deceased partner. While this makes some sense, it is not always fully thought through. For example, the continuing partner is typically faced with the option to buy out the deceased partner at short notice and funds may not be available. There is also the issue of how to value the deceased partner’s share. Often, this is not properly considered and the price or valuation mechanism may not be reflective of the real value.
Likewise, a mechanism that requires the deceased partner’s share be sold to a third party may not be practical or desirable – there may not be a buyer readily available in these circumstances. Even if there is, the continuing partner may understandably want some control as to who the buyer (and future business partner) might be.
Insuring SucCession
An alternative mechanism, which is becoming more widely known for the succession of business partnerships, involves an arrangement where the partners take out insurance policies that fund the buy-out of the deceased partner’s share following death. This arrangement is useful where the surviving partners have a strong desire to retain control of the business if a partner dies, but do not expect that they will have the funds available to fund a buy-out on their own. It may also be appropriate for businesses that are difficult to value because the parties can set the insured sum to an agreed figure which may be different to what a third party might otherwise pay. Depending on how the insurance is structured, the premiums may also be tax deductable. Naturally, this arrangement requires the expertise of a financial advisor, as well as a lawyer.
Another concept for consideration is whether to include in your succession plan, exit or retirement strategy, an arrangement or scheme to facilitate employee ownership in the business.
Don’t Risk It
The process of creating and tailoring a succession plan is just as valuable as the agreements that are put together as a result of it.
This is not something that can be implemented properly without seeking a combination of legal and financial advice – your plan must be tailored to your needs because no two people or businesses are ever the same. Do-it-yourself kits should be avoided, and one-size-fits all type solutions usually fit none.
Taking the time to think about and plan for the unexpected will make things a lot easier for those you leave behind.
Robert Shepley is a commercial lawyer at M+K Lawyers. He focuses on assisting health professionals and optical retailers throughout Australia with commercial agreements andtransactions. Contact (AUS) 03 9794 2641 or [email protected]
